Just because some guy on a blog/podcast/webinar says it’s great DOESN’T mean you should go out and buy one. There are pros and cons to multifamily investing over single family.

Therefore, today I thought I’d give you a quick summary of the pros/cons of multifamily investing to help you decide if it’s the right path for you. But first…

What is Multifamily Property Investing?

Multifamily properties are buildings with more than one unit.

A multifamily could be as small as two units in a duplex or as big as thousands of units in a large apartment complex. Few people ever buy a multifamily to live in (though I do love the strategy of “house hacking,” where an individual lives in one unit and rents the other units out), but instead, most multifamily properties are owned by real estate investors who rent the properties out to those who can’t — or won’t — buy a single-family home of their own.

Multifamily classification is generally split into two categories: small and large.

Small multifamily properties are any properties that contain two, three, or four units.

Large multifamily properties, therefore, are those with five or more units.

This is an important distinction because of the way these properties are valued and financed. Smaller multifamily properties are considered “residential” to most lenders and are thus seen as no different from an SFR. Large multifamily, however, is considered commercial real estate, and the rules change drastically.

I think we can all agree that too much debt is dangerous, especially when that debt is from student loans.

That’s why today I wanted to share the email exchange between a BiggerPockets member named Ford (with his permission) and myself. Ford and his wife are struggling to get started with real estate investing and facing an uphill battle due to their student loan debt.

Below I’ve posted Ford’s question, as well as my answer.

I know that Ford is not the only one in this position, so it is my hope this post can help more than just Ford. Perhaps you don’t have $180,000 in student loan debt, but perhaps you are struggling with debt, with trying to buy a house, or trying to invest in real estate with bad credit. Whatever is stopping you from achieving the success you want, let’s see if we can help you out.

I bought it for an incredibly cheap price of just $40,000. What a steal, right? Then I put about $40,000 worth of work into fixing it up and refinanced it, a strategy I call “BRRRR” (buy-rehab-rent-refinance-repeat).

And then it was all downhill from there.

You see, although I thought I was going to make a decent monthly profit on the property, the truth is: I don’t.

I lose money every single year.

Every. Single. Year.

Why?

CapEx.

The purpose of this post is to teach you what CapEx is and what you can do about it to avoid your own Hell House.

What is CapEx? (Capital Expenditures)

Everyone knows analyzing properties is important. After all, if you don’t have the right math going into an investment, you’ll never get the right profit coming out of it.

And most of us can estimate expenses like repairs, vacancy, and property management fairly easily. But the one area nearly every new investor struggles with is CapEx.

Why do the rich keep getting richer? Most of the time, it’s not because of luck. It’s not because of the family they were born into. It’s not because they won the lottery.

Wealthy people simply do things differently.

It may not seem fair, but the fact is the “income gap” is increasing and most financial expertsonly see this trend continuing with no end in sight.

In preparation for this column, I sat down with someone who knows far more wealthy people than I will likely ever meet: Jeff Rose. Rose is a certified financial planner, author and blogger at GoodFinancialCents.com, as well as a millionaire himself, who dedicates a good portion of his time to helping people become, and stay, wealthy.

I asked Rose why he thought the income gap was growing. He mentioned five primary things that wealthy people simply do differently than the rest of the world. Here are those five, in no particular order.

Remember that high school movie where the homely girl was transformed into the beautiful prom queen when she removed her glasses and put on some makeup?

(Yeah… me neither. I was watching Die Hard.)

The point is this: Human nature loves to see transformations. We love to see the before and after and marvel at what it must have taken to get from A to B. Just tune into any episode on HGTV to see what I’m talking about.

For this reason, people love to buy fixer-uppers. But is this always a good idea when investing in real estate? Should you invest in a fixer-upper when getting into rental properties? Let’s find out.

What Is a Fixer-Upper?

First, let’s all get on the same page as to what I’m even talking about when I use the term “fixer-upper.”

A fixer upper is a home that needs either minor or significant rehabilitation before it can be used for its intended purpose. This could refer to both a “house flip” or a “rental property,” but I’m mostly going to focus on the rental side. The repairs a fixer-upper can need range from light cosmetic work, such as fresh paint or new carpet, to more intensive renovations, such as a new roof, foundation, plumbing, or electrical.

I actually love investing in fixer-uppers. In fact, I’ve never purchased a property that didn’t require some level of rehab to get it to a rentable condition.

For me, it has just made sense.

On the 44th episode of the BiggerPockets Podcast, Michael Woodward tells a story about taking his kids to look at potential houses to buy. Michael mentions that when they walk into a house with an absolutely terrible odor, he turns and asks his kids, “Boys, what does that smell like?” In unison, they shout, “Money!”

What this cute story represents is often the truth with fixer-uppers: There can be money in the mending, riches in the restoration, freedom in the fixing!

At the same time, fixer-uppers do carry a large degree of risk and can turn your investment into a money pit. So let’s examine both the pros and cons of buying a fixer-upper.

(A special thanks to Keystone CPA for their help in making sure the information below is as correct as possible!)

Taxes suck, don’t they?

Sure, they pay for our roads, our schools, our bank bailouts, and our welfare system… but they are kind of the pits.

But what if I told you there was a way to make them suck a little less?

Enter: The 1031 Exchange. To a lifelong real estate investor, this little trick might completely revolutionize your business and help you save on taxes AND build significantly more wealth. This post will be your road map to make this happen.

What is a 1031 Exchange?

If you decide to sell a rental property at some point, you will need to pay taxes on that gain.

Bummer.

Now, this might not be a big deal if you are a terrible investor or have had some bad luck and you don’t have any financial gain. But hopefully you are a smart real estate investor. You read BiggerPockets, after all. You aren’t going to make some measly profit or sell at a loss. You are going to rock this game and make some serious moolah when you sell! In short, you are going to have so much cash that you’ll need to get yourself some bigger pockets. (See what I did there!?)

But then Uncle Sam is gonna come a-knockin’ for his piece of the pie. And trust me, he’s got quite an appetite.

Don’t fret, though! I’ve got some good news: The IRS wants to partner with you on that money by allowing you to do a 1031 exchange.

Seriously? Partner? With the IRS?

Yep. Through a 1031 exchange.

A 1031 exchange (pronounced “ten thirty-one exchange” if you are cool like me), is a tax strategy so named because of its inclusion in Section 1031 of the IRS tax code. It also commonly known as a “Starker exchange” or a “Like Kind exchange.” In essence, a 1031 exchange allows an investor to “defer” paying any property taxes on the property when it is sold, as long as another “like-kind” asset is purchased using the profit received. We’ll talk about exactly what that means in just a moment, but let’s cover the big picture first.

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